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Will OPEC increase supply in the 2nd half of 2007? Or has Ghawar peaked?
Posted by Rembrandt on June 21, 2007 - 11:00am in The Oil Drum: Europe
Topic: Supply/Production
Tags: crude oil, demand, eia, iea, opec, supply [list all tags]
Concerns about a gap in crude oil demand/supply in the 2nd half of 2007 increased in the past months. The International Energy Agency (IEA) and it’s sister organisation, the Energy Information Administration (EIA), have both told the OPEC cartel that OPEC must increase supply to avert rising oil prices. Presently the agencies expect a crude oil demand/supply shortfall of 1 million barrels per day towards the end of the year. However the OPEC cartel is of the opinion that oil markets are well supplied and therefore there is no need to increase supply at the moment.
This discussion, as shown below, boils down to the expectation for non-OPEC supply and world demand in the 2nd half. If the IEA and EIA projections are correct, we will soon find out what is going on in Saudi Arabia with the production of the supergiant oilfield Ghawar.
The Statements by the EIA and OPEC
Since March the Energy Information Administration has given warnings to OPEC that it must increase supply:
“OPEC must increase oil production by more than a million barrels per day if a rise in prices is to be avoided in the coming months, the Energy Information Administration said.”
Analysis from the International Energy Agency leads to a similar conclusion:
“OPEC needs to raise its crude oil output in the coming months to ensure an adequate supply, the head of the International Energy Agency said Monday.”
OPEC does not agree and released a press statement on June 14 stating that:
“OPEC notes oil markets remain well supplied and market fundamentals do not require any additional supply from the Organization at this time ... A combination of current high inventory levels and increasing OPEC spare capacity, which is expected to reach around 15% in the second half of this year, means there are adequate supplies available to cope with any upward revisions to oil demand forecasts.”
Demand and Supply expectations
The difference in the OPEC vs. IEA/EIA discussion can be seen in both supply and demand. OPEC expects non-OPEC supply to increase with 1 million b/d from the 1st to the 4th quarter of this year. The EIA expects an increase of 800.000 b/d and the IEA an increase of 500.000 b/d.
World demand expectations differ by 400.000 to 500.000 b/d in the IEA/EIA forecasts from the OPEC forecast for the 4th quarter.
Based on the figures above, OPEC thinks that there is no need to increase production based on their expectations for supply and demand. The IEA thinks that OPEC should increase production with 1.50 million b/d from present levels of 30 million b/d. The EIA figures are even more drastic, requiring OPEC to increase production with 2.60 million b/d from present levels. In their forecast they already have incorporated the rosy expectation that the cartel increases production with 1.7 million b/d!
Current inventory levels
Regarding high inventory levels the OPEC cartel is correct. Total OECD crude oil stocks reside at a level of 960 million barrels. Quite near the highest level in the past five years of 996 million barrels reached in march 2006 and far above the lowest level in the past five years of 842 million barrels reached in September 2002. Currently crude oil demand and supply are in balance, which makes the IEA demand/supply projections for the 1st quarter the most likely. But, this does not imply that a similar situation can be expected for the 2nd half of the year.
Can OPEC increase production?
The suggestion that OPEC can pump up 15% extra is dubious at best. This would amount to an increase of 4.5 million barrels per day from current crude production of 30.1 million barrels per day. All countries within OPEC except Saudi Arabia are pumping crude near maximum. Maybe, with the best of efforts, these countries could increase production with a total of 500,000 b/d. This means that most of the needed increase in crude oil production from OPEC must come from Saudi Arabia.
Whether Saudi Arabia is able to increase production significantly remains speculation. Crude oil production in the country dropped from 9.52 million b/d in march 2006 to 8.61 million b/d in may 2007. The cause of this drop could either be an artificial lowering by the national oil company of Saudi Arabia, or due to the peak in the supergiant oilfield Ghawar. This discussion has already been taking place on the oildrum for several months, of which the culmination came from Stuart Staniford and Euan Mearns with their articles on the status of Ghawar.
While we currently do not know the exact cause, it looks like we are about to find out in the 2nd half of this year, if the IEA & EIA projections for demand and non-OPEC are correct.
Sauda Arabia has peaked, so fasten your seatbelts and get ready for a real rollercoaster ride.
I am only one.
I cannot do everything.
But still I can do something
World Crude Oil & Lease Condensate Production Rate Changes
Mar 2007 world production of crude oil & lease condensate (C&C) has declined since Mar 2006 and also since Feb 2007. Saudi Arabia, the North Sea and Mexico are showing large production falls. New Buzzard oil has not prevented the North Sea from continuing to decline. Mexico will continue declining as Cantarell declines.
Many countries are showing good increases in production. However, only some will be sustainable. Canada’s increase is due mostly to oil sands and will increase further only if there are sufficient inputs of water and inexpensive natural gas, as well as easy environmental constraints. Production rates from USA, Russia, and Iraq are likely to stay constant to 2009. Azerbaijan, Angola, Brazil and Kazakhstan production rates should increase.
On balance, total production falls are just greater than total production increases. As Saudi Arabia has peaked, this situation will continue which will cause world C&C production to continue declining very slowly.
Click to enlarge - This chart will be updated when EIA Apr 2007 data is released, before mid July 2007.
In the likely event that IEA/EIA has to backtrack on their projections for possible supply growth, what happens?
Has anybody done detailed analysis, what would be estimated optimistic scenarios for increases in Iraq and African countries on the short-term, IF the security/political situation didn't hamper production?
I do not expect the security situation to improve miraculously.
This is a mere thought-game to think if there is still any significant short-term spare capacity outside KSA?
I understand the importance of KSA and super-giants in particular, but it'd be interesting to see a summary of possible capacity increases from USA's major oil importing region, which I believe is now Africa.
@Samum
Your optimistic Iraq case if there were no violence, plenty of cooperation and large foreign inflows would be an increase from 2 mb/d now to 3 mb/d in 2010 and 6 mb/d in 2020.
In Africa there is about 600.000 b/d - 800.000 b/d offline in Nigeria, which can be added on a short term basis if violence seases.
Both scenario's are very unlikely.
Why do we listen to anything that has "Information" and "Administration" in the title?
We have an agency that is going to 'wish' more production into existence, but we don't have an agency to demand less consumption.
If we bury our heads in the numbers, we can easily justify driving to work to analyze more numbers, since that is the paradigm. Maybe the OPEC countries are right, maybe they don't go far enough. Sometime, the monkey on our back is going to bite our head off. That head is the economy based on perceptions of perpetual growth.
OPEC saying that "there's no need to increase production" is some severe spin where they should be saying that they _can't_ raise production. Get ready for oil prices to go into outer space! The SUV drivers are going to get MAD AS HELL at the gas pump.
Wait as road projects incur massive cost overruns as asphalt at the bottom of the fractionating towers gets cat-cracked into "crude" to be recycled with the real crude. Buy your blacktop patch before it gets to $5/gallon! I had to use 2 pallets of the stuff to try to patch craters in a parking lot that looks like the lunar surface. I told my boss that they had better repave that lot now before it gets MUCH more expensive later, explaining how refineries are starting to cat-crack the asphalt. The 2 skids didn't even come close to filling the two largest craters, one so huge I could park my car within the confines of the largest with ease.
A comparatively smaller example of sheer waste are those grocery bags that cashiers use like they are in a competition to waste them. You know, 2 items per double-bagged bag. America uses 33,000 barrels of oil per day just to wastefully bag groceries! And they _all_ end up in the landfills. 100 million years, when intelligent cockroaches evolve, our landfills will contain all the ingredients of high-tech civilisation. Just separate it all.
Petrol prices high enough yet? Just wait!
Mad Max,
What is 'cat-cracking' asphalt, and how does it advantage refineries to do it? I've never heard this term before.
Thanks,
Jonathan
Winnipeg, Canada
P.S. Did your boss listen?
Remember, its possible the answers to both the title questions.....
(Will OPEC increase supply in the 2nd half of 2007? Or has Ghawar peaked?)
...could be "no".
======and===============
sure, Saudi could be on some sort of bumpy plateau or near peak. Also, alot of what I read assumes..i spose as we all do..that the current governments-of-the-day will continue to hold. But somewhere along the line, the Saudi monarchy/gov't may (will?) fail and then who knows what will happen, i.e. the "above ground factors" that folks are talking about in Nigeria oil situation these days
YES! :-)
But unlikely, as you say the political situation in KSA is dangerous, so to withhold oil at the risk of destabilizing the WORLD economies and which could reduce the prices of oil is a very RISKY play...unless you can't raise production and know it won't reduce the prices(ie. supply shortage).
Equally well the answer could be YES.
I, like quite a few others, believe SA locked in surge production capacity to produce maybe 2-3Mbpd of extra production, but only for a short period. Averaged over reasonable periods the trend can still be down, but with the occasional political induced 'spike'.
Its worth SA's while to create a short term constricted supply (say over $100 a barrel) to induce efficiency activities and reduce ongoing demand - then to ride to the news rescue with a surge of production. Not only do they get to be the good guys, they get to push the world demand economy towards behaviours they might have more chance meeting.
In fact, such a scenario is more likely than turning on the taps ahead of time, if we are close to a peak date.
It's worth remembering that (spare) pumping capacity reflects the amount that can be brought online within 30 days and that can be sustained for at least 90 days.
It's easy to prove the peak has not happened yet (either in KSA or the World) by having at least six consecutive months at or above levels previously established (and simultaneously proving you have the capacity to be the swing player in the oil market). For the KSA, that's 9.6 MMBPD. Globally, that's 74.2 MMBPD (C+C) from May 2005.
The "markets," quite frankly don't believe the situation will improve, as they have been in an extended contango. That may give partial explanation as to why crude oil stocks have continued to increase in the OECD.
But in terms of "days supplied in stock " the difference between the 5-year "low" (and the contemporaneous usage rate) and the current value is less than 14 hours (13.15 currently days versus 12.58 days at the "low" using C+C as the basis).
uh..... by who's definition does "spare" capacity equal production that can be brought on line within 30 days and that can be sustained for 90 days ?
I'll dig for the link but it was EIA that defined this.
http://www.eia.doe.gov/emeu/steo/pub/3atab.html
In the footnotes its defined in several places.
So KSA may not be lying about spare capacity its just not what a lot of people think it is.
Is their anyway to adjust the oil supply numbers for growth.
You would expect stocks to increase in the OECD countries because of simple demand growth. I'm not sure if this is a big factor or not.
Next I'd have to side with OPEC on this issue at least for now
given the high levels of stocks its tough to call for a increase now and they would have plenty of time to increase supply if stock draw downs become obvious. Or at least I assume they would. This leads to my next question how long does it take for us to go from well supplied to under supplied. One month two three given our current import rates.
I'd have to guess it takes several months for this to happen.
From your graph I'm guessing 3-4 months to go from over to under supplied so I would have to side with OPEC and say do nothing for several more months. I believe they said the would re-evaluate the situation in September which sounds about right.
Now the point that if nothing is done we will get price increases I think OPEC is shooting for a new firm floor price of 70+ before they release any oil if they can. So I don't think you will see them do a thing until the price is well above 70 and then we might be able to see what KSA can do but on the same hand they may do a short token increase based more on straining the fields and drawing down storage then come back and say they are comfortable at the new price. Overall I'd have to side with OPEC on this one.
Can't the situation be seen this way as well?
$70/barrel do create a lot of demand destruction outside OECD. The food truck that did not get to were it was going in Africa do not get MSM attention. OECD stocks are high because we have demand destruction in OECD as well. People buy less gasoline than expected due to high price = higher inventories.
Even at §100/barrel I would expect OECD to keep up the inventories (what is the alternative?). Reduced availability of crude and higher prise will not affect inventories in OECD at all. It will only create demand destruction, especially outside of the OECD.
If we have a HUGE physical lack of crude and prises close to $200/barrel, than maybe OECD inventories would be affected, but I can not see one good argument on why there should be a link right now between inventories in OECD and world wide use. If there is such link I would rather see it being the other way around. High price = high inventories in the OECD due to less use (because of high prise).
Except gasoline demand is up.
Yes, but not up enough to create a problem. Why do OECD build more stocks?
1. Because they belive Crude is cheep now?
2. Because they believed demand would be even greater than it became?
3. Unknown factor?
4. Unknown unknowns? (Thanks Donald)
For me it is abvious that OECD can handle §70/Barrel, but the price increase must have led to demand destruction somewere. That demand destruction might mean that the increase in crude sales is less than it had been at say $30/barrel. It does not have to be a decrease in use for us to have demand destruction.
Do the poorest people on earth really buy as much oil know as they would have at $30/barrel?
For me it is obvious that OECD can handle $150 oil. Or $250 oil. But not the rest of the world. That is, as long as you can *get* the oil you want at those prices.
Cheers, Dom
Munich
Exactly!
And that is why OECD inventories have very little to do with how well the world market is fed with oil from OPEC.
OPEC is putting up a smokescreen here, or do any TODers have any good arguments to counter that?
There is no way to know with ironclad 100% metaphysical certainty what OPEC is up to. We should instead look at various scenarios as more or less likely. For example, anybody who claims to have full knowledge of Saudi Arabia's reserves and production capacity has no credibility IMHO. We have to live with the fact that there are many things we would like very much to know--but which cannot be part of our knowledge but rather only opinion, more or less supported by facts.
Facts NEVER speak for themselves. Facts must be interpreted in terms of theory or models, such as Hubbert's Peak. Where we differ on TOD is not so much as to "facts" but rather as to the interpretation of these facts (e.g. Westexas's vs. Robert Rapier's interpretation).
Agree, but I still do not get why OPEC says:
"We do not need to increase the supply, since the OECD stocks are in good shape". I do not understand the logics here. I can not see the link.
It does not have to be a smokescreen of cource, it could be just good ol' stupidity, or can any of you explain this argument from OPEC for me, i.e. it might be my own stupidity that comes in to play here...
My hunch is that OPEC wants to keep crude in the sixty to eighty dollar range; in other words, they do not want to increase output. Whether they could increase output if they wanted to does not matter in the short run if the case is such that they do not want to drive prices down by allowing output to increase.
Agree again, BUT DO YOU UNDERSTAND THE OPEC ARGUMENT regarding OECD stocks? I do not! Does anybody?
No it makes no sense. As long as the oil markets are in Contango the natural move is to buy and store. Effectively hoarding oil. You have to look at the price. OPEC is not happy with the what they now consider a bargain price for oil and they want it higher. I've posted a few times that the last thing we will see before TSHTF is low oil inventories in OECD countries and it will be at far higher prices than today.
What I think is happening is OPEC is testing to see of non OPEC sources can deliver or if OECD stocks will go down. The reason is very sinister they want to repeat the 1970's embargo and get rid of Israel once and for all. At the moment they are a bit peeved because its not clear that a embargo would be devastating.
I'd suggest you give it a year or so and the political goals of OPEC will become clear in any case I fully expect another Arab embargo in the next few years.
I think they're well aware of PO and they're keeping us supplied until TSHTF. The battle between Islam and everyone else is a chess game...a marathon, not a single move game or a term-by-term race. While Iran openly admits they'll play their oil weapon when they see fit, OPEC has kept their overall strategy under the radar.
____________________
MySpace.com/ziontherapy
I think they're well aware of PO and they're keeping us supplied until TSHTF. The battle between Islam and everyone else is a chess game...a marathon, not a single move game or a term-by-term race. While Iran openly admits they'll play their oil weapon when they see fit, OPEC has kept their overall strategy under the radar.
____________________
MySpace.com/ziontherapy
What battle between Islam and everyone else? There is certainly an attack on Islam by everyone else, especially Western zealots and fundamentalists. Don't confuse the mugger with the victim. Islam is the victim not the aggressor.
Let's get things the right way round. During the European crusades against Islam in the middle ages, Islam was also portrayed as the aggressor, whereas in reality it was the victim of the barbarous crusades.
I think you will find the real enemy and therefore the "real battle" is much closer to home.
Triumvirate of collapse - Economy, Ecosystem, Energy
I try to stay out of political debates but this crap is so far out in left field I must comment. The three thousand people who died on September 11, 2001 were not muggers. How dare you suggest such a thing!
What happened one thousand years ago is not pertinent to this discussion. You may as well agree with those who say we owe money to the ancestors of slaves because our ancestors held slaves. At any rate the crusades were driven by religious fanatics, just as all Islamic terrorism today is driven by religious fanatics.
I agree that the Jews should have stayed out of Palestine, but that is now water over the dam. Neither you nor I had any say in that decision and we should not have to suffer the consequences. Bombing inniocent people becase of past errors is no way to settle differences.
Islam is a religion that believes that the infidel, (anyone not a Moslem), should be killed. The Koran divides the world up into two worlds. The world of Islam and the world of war. All the world is to be converted to Islam or be killed.
Now I know moderate Moslems do not agree with that position. But deep in their hearts most of them do. It is holy writ if you are a Moslem.
Follow the news out of Britain today. They are marching in the streets. They wish to make the law of the Koran the law of Britain. And they don't care who they have to kill to accomplish that goal.
Ron Patterson
"Nobody can just write what he thinks without proof. But we have real proof that that the story of Adam as the first man is true"
"What Proof?"
He looked at me with disbelief: "It is written in the Koran."
Science and Islam, Discover Magazine
The whole "does Islam preach killing of infidels" thing has been done to death all other the internet. Here's one link:
http://qa.sunnipath.com/issue_view.asp?HD=7&ID=9801&CATE=3000
It's not particularly difficult to "prove" that Judaism preaches the same thing by pulling particular passages out of the OT. Christians tend to let themselves off the hook by claiming that the NT showed a "new way" of love and tolerance etc. etc.
All mono-theistic religions are essentially "supremist" and destructive. In this current day and age, it may be that Islam has more than its fair share of followers that take this to an extreme, but that hasn't been true in the past, and there's no real proof that Islam is inherently worse than Judaism or Christianity in this regard.
I'm sorry, but I'm afraid the West are the muggers, and there is nothing historical in this statement. We are the ones who have been putting Islam on the spot by continually pushing our ideals, our economics and our values upon them (not to mention dictators, regimes, etc.).
Nothing political or religious, just an observation. I see no occupation of the West by Islam, no military bases or armies on our land, no fleets off our shoreline. In terms of scale the agression is practically all one way. The West is the aggressor, whether by military force, economic force or simply by pushing its culture upon a people who do not want it. Just look at which way the military convoys are going.
And don't put 911 on me as though it has some special meaning, it was just another atrocity amongst many, committed by people whose motives are mostly unknown.
I have no connection with Islam, but cannot abide the propagandist nonsense that there is a clash of civilisations or other such rubbish.
Triumvirate of collapse - Economy, Ecosystem, Energy
No particular disagreement here, I was merely looking at the issue from a comparative-religion standpoint.
Much as I have no time for religion, it's pretty hard to demonstrate that the U.S.'s military incursion into the M.E. has much to do with any sort of Christian superiority complex (though I'm sure it exists).
I am, on the other hand, prepared to defend the military imposition of democracy in extreme cases, providing it's done with that intent and done properly (as was quite obviously not the case in Iraq).
There are some 1 billion Muslims.
Undoubtedly any generalizations about beliefs about such a large group embedded across such a wide range of cultures and soceities is likely to be fraught with error.
Are Muslim countries more likely to support genocide? In the most recent incidents of geneocide the perpetrators were Christian (Rwanda and Bosnia), Marxist from a predominately Buddhist culture (Cambodia), and Darfur - where Muslim Arabs are persecuting Afrcian Arabs.
The largest scale genocides of the 20th century were carried out by Christian nations (Germany), Marxist nations with predominately Christian backgrounds (USSR) and Marxist nations with Confucian/Taoist cultures (China).
I think it is much simpler than all this stuff about religious zealotry. First they fought to force the Russians out of the Afghanistan (with our help) and now they are trying to do the same thing to us. It’s a good old fashion anti-colonial struggle. We should take their word for why they oppose us.
We have a very heavy footprint in their part of the world because we need their oil and gas. (You should know. You were part of it.) That effect is not surprising. But it is also not surprising that many people do not like us being there. We have brought about wrenching dislocation of their society and culture. Just imagine how people in the US would react if people from the Islamic world moved into the US in comparable force to our presence there and brought about similar changes here to our society and culture. Why do you think we have a second amendment? We would try to throw them out too, as we have in the past to much more familiar people.
Except people are moving into the US all the time and changing its society and culture, and have been for thousands of years.
Yeah, because they are relatively few compared to what is happening in the Middle East and most of them share much of our cultural heritage, they are not totally changing the nature of our society and violating our culture. They are successfully assimilating. It would be better for Saudi if that were happening there, too. But it's not. Its not a question of what should be happening to them. It is what is happening to them.
Thousands of years? What was 1776?
Accepted, technically before 1776 it wasn't the "U.S." - let's say the Americas.
Of course I realise there's a significant difference between the general pattern of "intrusion" into the Americas and the recent pattern of Americans into the M.E. Some Native American tribes might beg to differ, of course.
Note also that most M.E. countries have social structures and laws that make it virtually impossible for outsiders to 'assimilate'. We have a U.S. presence (civil and military) in Australia - it also exists in the U.K., Japan, and various other nations, all of whom (for the most part) are happy to have it there.
Especially in 1492.
I think they were testing the world production by 2005/2006, and are acting now. That could explain KSA dropping production.
I also think that it is about money, not Israel. Altough, Israel is about the US controll, so it may be involved.
Anyway, above ground factors (caused by the proximity of the geological peak) are a very nice explanation for what we have now. That would explain OPEC working into increase its market-share (with more countries), if it was a geological peak, OPEC would have no reason to grow. But above or below ground doesn't really matter, it's peak both ways.